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Global Downturn Tests the Euro

LONDON:The crises in southeast Asia, Russia, and Latin America are confronting the European single currency with its first major challenge. For now, the over-riding priority for the EU is the successful launch of the euro on January 1, regardless of the world’s economic storms. But if the European fallout from Asia and Russia turns out to be severe, European Union governments may be compelled to re-examine the single currency’s deflationary bias.

Earlier this month, the Group of Seven top industrialised countries responded to growing fears of a world economic slowdown, by pledging to sustain growth-oriented policies in their own economies.

Many commentators at first took this for a signal that the rich countries stood ready to reduce interest rates, to counter the deflationary pressures from southeast Asia and Russia. But those expectations were quickly quashed when Hans Tietmeyer, President of the German Bundesbank, and Alan Greenspan, chairman of the US Federal Reserve, both disclaimed any prospect of a concerted reduction of interest rates.